HELP ON PART 2

You bought a piece of land at $1,500,000. You plan to build a 45,000 square foot building at cost of $150 per square foot, all inclusive, in addition to land cost. The completed building is expected to generate a monthly net of $2.00 per square foot per month for year 1 and the rent will increase at 4% per year. The operating expenses will be 0.40 per square foot per month for year 1 and increase at 3% per year. At end of year 10, you plan to sell the property for $10,500,000. Assuming you will have an income tax rate of 35% every year and you will take depreciation charge every year based on the IRS allowed schedule of 1/39th of the building cost only per year. Your capital gain tax rate is 20%.

Part 1: Assuming all cash investment and using a MARR of 8%, what is the Net Present Value of this 10-year investment and what is the IRR?

Part 1 answer below Part 2: Assuming you will obtain a bank loan of 65% of the initial cost at an interest rate of 7.00% per year. The loan requires interest payment only at end of each year and the loan principle is due at end of the 10th year (like a bond arrangement). Everything else stays the same as Part 1 except interest expenses are tax deductible. Re-calculate everything as you did in Part 1. Based on the result of Part 2 and an Incremental IRR analysis, make your recommendation as which way, either Part 1 or Part 2, to do the project and explain how does financial leverage affect your decision in relation to the selection of this project?

Building Area (SF) $ 150 Rent/SF/MO $ 2.00 Exp/SF/MO $ 0.40 Base at end of each year OHNM Sales Price BVO Capital Gain Tax @ 20% 10,500,000 8,250,000 2,250,000 450,000 45,000 Land cost LTV 2.56% 6,750,000 6,576,923 2.56% 6,403,846 2.56% 6,230,769 2.56% 6,057,692 2.56% 5,884,615 2.56% 5,711,538 2.56% 5,538,462 2.56% 5,365,385 2.56% 5,192,308 2.56% 5,019,231 2.56% 1,500,000 Bldg Cost $/SF 65% 7.00% Dpreciation BV 8,250,000 173,077 8,076,923 173,077 7,903,846 173,077 7,730,769 173,077 7,557,692 173,077 7,384,615 173,077 7,211,538 173,077 7,038,462 173,077 6,865,385 173,077 6,692,308 173,077 6,519,231 BV10 recapture Tax @ 35% CFAT 6,519,231 1,730,769 605,769 9,444,231 $ 10 Revenue Operating Expense EBITDA Depreciation Charge Taxable income Tax @35% tax rate Net Income CFAT 5 1,080,000 $ 1,123,200 $ 1,168,128 $ 1,214,853 $ 1,263,447 216,000 $ 222,480 $ 229,154 $ 236,029 $ 243,110 864,000 900,720 938,974 978,824 1,020,337 173,077 173,077 173,077 173,077 173,077 690,923 727,643 765,897 805,747 847,260 241,823 254,675 268,064 282,012 296,541 449,100 472,968 497,833 523,736 550,719 622,177 $ 646,045 $ 670,910 $ 696,813 $ 723,796 1720 $ 1,313,985 $ $ 250,403 $ 1,063,582 173,077 890,505 311,677 578,828 $ 751,905 $ 1,366,545 $ 1,421,206 $ 1,478,055 $ 257,915 $ 265,653 $ 273,622 $ 1,108,629 1,155,554 1,204,432 173,077 173,077 173,077 982,477 1,031,355 327,443 343,867 360,974 608,109 638,610 670,381 781,186 $ 811,687 $ 843,458 $ 1,537,177 281,831 1,255,346 173,077 1,082,269 378,794 703,475 876,552 $ 4 696,813 $ 646,045 $ 670,910 $ $ 723,796 $ 751,905 $ 781,186 $ 811,687 $ 843,458 $ 10,320,782 CF NPV @ MARR of IRR = (8,250,000) $ 8% 9.7% 622,177 987,970